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If your goal is to reduce your debts, here are four ways to achieve this, along with the pitfalls of each.
Debt consolidation through credit counseling
One of the most popular ways to reduce debts is through consumer credit counseling. The best of these agencies are nonprofits. They offer their services either free or at a very low cost. They can do this because lenders such as banks and credit card companies underwrite their operating costs.
The benefits of credit counseling
When you choose credit counseling, you will have a credit counselor. This person will review all of your finances. He or she will help you make a budget as well as a plan for paying off your debts (usually called a Debt Management Plan). This plan will be presented to your creditors. If they all accept it, you will no longer be required to pay your creditors. Instead, the credit-counseling agency will pay them. You will send it a payment a month until you complete your plan. This payment will be less than the total of the monthly payments you’ve been making.
The pitfalls of credit counseling
The biggest pitfall of credit counseling is that you will need to have the self-discipline necessary to change your spending habits and to stay on your budget for the five years it will take you to complete your plan.
The benefits of a debt consolidation loan
A second way to reduce your debts is to get a loan and pay them off. This accomplishes two things. First, you will get all those creditors and collection agencies off your back. Second, the monthly payment on your loan should be much less than the sum of the monthly payments you’ve been making.
The pitfalls of a debt consolidation loan
The biggest downside of these loans is that you may not be able to get one. Financial institutions are usually not anxious to loan money to someone who is already in trouble financially. If you own your own home and have sufficient equity in it, you could get a secured loan. If you don’t own your own home or don’t have enough equity to pay off your debts, you would have to get an unsecured loan, which could be more difficult and more expensive.
The benefits of debt reduction through bankruptcy
A chapter 7 bankruptcy will more than reduce your debts. It will eliminate many of them. For example, it will discharge unsecured debts such as medical debts, personal loans and credit card debts. The purpose of a chapter 7 bankruptcy is to give you a fresh start. If most of your debts are unsecured debts, it can do just that.
The pitfalls of a bankruptcy
A chapter 7 bankruptcy cannot discharge secured debts including your mortgage or auto loan. It also cannot discharge student loan debts, alimony and child support and past due taxes. Plus, it will go into your credit file and stay there for seven or 10 years. It will make it very difficult for you to get any new credit for two to three years after your bankruptcy. Because bankruptcies are public records, yours will stay with you forever and could prevent you from getting a job someday.
The benefits of debt settlement
A fourth way to achieve debt reduction is through debt settlement. When you contract with National Debt Relief to settle your debts, we will negotiate with your creditors to get your debts reduced substantially and to help you become debt free in a reasonable amount of time.
The pitfalls of debt settlement
The biggest negative of debt settlement is how it will impact your credit score. However it will not reduce it as much as would a bankruptcy, which can lower your score by as many as 200 points.
